Reverse Mortgages

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					  ab Mortgage Strategist

                                             Reverse Mortgages
  Reverse Mortgages are instruments designed for older homeowners; they allow the equity in a home to
  be monetized. At the initiation of the reverse mortgage, a homeowner elects to take out either a lump
  sum payment, a fixed monthly payment for life, or can have access to a line of credit. The reverse
  mortgage loan must be paid in full when the last surviving borrower dies, moves, or sells the home.
  Reverse mortgages take 3 forms:
      1. HECM (Home Equity Conversion Mortgages), insured by the FHA
      2. Fannie Mae Home Keeper Reverse Mortgages
      3. Proprietary reverse mortgages
  In this article, we look at the characteristics of reverse mortgages. These products, while still a very small
  part of the U.S. mortgage market, have shown robust growth the past 2 years. Moreover, with changing
  U.S. demographics, we expect their popularity to increase considerably over the next few years.
  In this article, we first take a quick look at U.S. demographics. We then go into the characteristics of
  reserve mortgages. Finally, we review the three types of reverse mortgage programs, emphasizing the
  HECM product insured by the FHA (since more than 90% of total origination to-date has been in that

  There is no question that reverse mortgages should command far more focus than they have. Their market
  potential is strongly on the upswing. To take out a reverse mortgage, a borrower must be 62 years of age
  or older. And the oldest of the baby boomers reach age 62 in 2008.
  It is easy to quantify that
  as the baby boom genera-                                                     Figure 1. US Population Ages 65+
  tion moves toward the ge-           23
  riatric ward, it will cause         21
  a large shift in the % of the       19
  U.S. population over age            17
  65. Figure 1 (at right)             15

  shows that over the last 25         13

  years (from 1980 to 2005),          11

  the % of the U.S. popula-            9

  tion aged 65 and older has           7

  expanded from 11.2% to               5





















  12.3%. It will be 14.1% in
  2015, 17.7% in 2025 and
  19.2% in 2030.
  And as our colleague George Magnus shows in a very interesting UBS Investment Research Study
  “How Are Demographics Changing the Global Economy” (April 6, 2006) - - the aging of the population
  is very common across the globe. Figure 2 (next page) shows “old age dependency” ratios—that is, the
  % of the population over 65 as a % of the working population. Note that in the U.S., the old age depen-
  dency ratio will rise from 18% in 2005 to 31% in 2030. Other industrialized countries will exhibit similar
  rises (from 24 to 35% in the UK, 25 to 41% in France, 28 to 45% in Germany, 30 to 49% in Italy and 30 to

June 6, 2006                                                                                                                                                                              8
  ab Mortgage Strategist

                               Figure 2. Old Age De pe ndency (over 65's a s % of labor force)








                      2005               2010                 2020                  2030           2050
                                        US    UK    France   Germany     Italy   Japan

  52% in Japan). What makes the U.S. unique is that             rower (younger borrowers receive less money), the
  (quoting Magnus’ report, page 35):                            appraised home value, current interest rates, and
       “American has one of the-if not the–most                 the lending limit in a particular area, if applicable.
       expensive healthcare systems in the world.               The mortgages can be prepaid at any time.
       U.S. spending on healthcare is about two                 Reverse mortgage loans are generally payable in
       times as much per person as in the whole
       of the OECD on average, but despite this,
                                                                full when the last surviving borrower dies or sells
       life expectancy is not higher than else-                 the home. The mortgage may also come due if the
       where.”                                                  borrower moves (first 2 bullets) or defaults (sec-
                                                                ond two bullets). If:
  With the aging of the U.S. population, we would
  expect products, such as reverse mortgages, de-                      • the borrower permanently moves to
  signed for the over 65 crowd, to become ever more                      a new principal residence
  popular. Moreover, with the increasing “old age                      • the last surviving borrower fails to live
  dependency ratio”, it is reasonable to expect                          in the home for 12 months in a row
  changes in Medicare and Social Security such                           due to physical or mental illness
  that older individuals have even more reason to                      • the property deteriorates, except for
  tap into the accumulated equity in their homes                         reasonable wear and tear, and the
  in the years ahead.                                                    borrower fails to correct the problem
                                                                       • the borrower fails to pay property
  How Does A                                                             taxes or hazard insurance, or violate
    Reverse Mortgage Work?                                               any other borrower obligation.
  In a reverse mortgage, the homeowner receives                 A simplified example, shown in Table 1 (next page)
  cash, either as an up-front payment, as a monthly             will make this more clear. A 75 year-old borrower
  payment, or as a line of credit. That money is not            has taken out a reverse mortgage. Assume the house
  taxable (technically it is considered a loan advance,         is now worth $250,000, the borrower has $200,000
  not income), and can be used to live on. It does not          of equity and a mortgage for $50,000. This simpli-
  impact Medicare or Social Security Benefits. It               fied example neglects up-front fees, mortgage in-
  could potentially impact Medicaid benefits. The               surance (when applicable), assumes a fixed interest
  loan amount will depend on the age of the bor-                rate (when interest rates on this product are gener-
June 6, 2006                                                                                                             9
  ab Mortgage Strategist

                                   Table 1. Reverse Mortgages: A Simple Example

       Borrower Age: 75 years old
       Recent Appraised Home Value: $250,000
       Mortgage: $50,000
       Equity: $200,000
       Estimated Annual HPA: 5%
       Estimated Annual Interest Rate on Loan: 7% (.5654% per month)

       Option 1: Lump Sum Payment
       Loan Amount $144,590
       Cash Available: $94,590

       Option 2: Monthly Payments
       Monthly Loan Payment (without lien) $1021
       Monthly Payment (after lien paydown) $668

                                                    Borrower Chooses Option 1:   Borrower Chooses Option 1:
                                                              Dies at 80                    Dies at 90
       Proceeds from Sale of House:                319,070 =                     519,732 =
       5% HPA                                      250,000 x [(1.05)^5]          250,000 x [(1.05)^15]
       Less: Accreted Value of Loan at time of     202,793=                      398,917=
       death                                       144,590 x [(1.005654)^60]     144,590 x [(1.005654)^180]
       Money Back to Estate                        116,277                       120,815
                                                    Borrower Chooses Option 2:   Borrower Chooses Option 2:
                                                              Dies at 80                    Dies at 90
       Proceeds from Sale of House:                319,070 =                     519,732 =
       5% HPA                                      250,000 x [(1.05)^5]          250,000 x [(1.05)^15]
       Less: Accreted Value of $50,000 loan (to    70,126 =                      137,947=
       pay off 1 lien)                             50,000 x [(1.005654)^60]      50,000 x [(1.005654)^180]
       Less: Future Value of Monthly Payments @ 47,828                           208,990
       Money Back to Estate                     201,116                          172,795

  ally variable), and gives the borrower a choice of         Table 1 first looks at the case in which the borrower
  only two payment options: taking the cash all up-          elects to take Option #1, the up-front payment, and
  front or taking the cash in the form of a monthly          dies at 80, exactly 5 years (60 months) after taking
  payment upfront. If the borrower chooses to take           out the loan. We assume the house has appreci-
  out a payment up-front in lump sum form (Op-               ated by 5% per annum, and is now worth $319,070.
  tion #1), then based on age, value of home and             The loan ($144,590) must be repaid with interest.
  interest rate, the maximum amount that can be              Assuming an annual interest rate of 7% (equiva-
  received up-front is $144,590. He must then apply          lent to a monthly rate of 0.5654%), the estate must
  $50,000 to pay down the first mortgage. That frees         repay $202,793 (144,590 x ((1.005654)^60)). Thus,
  the borrower from making further interest pay-             the $116,277 difference ($310,070 house value –
  ments on the mortgage, and leaves him with                 $202,793 loan repayment) flows back to the estate.
  $94,590 of cash. By contrast, if the borrower              The far right section of Table 1 shows the scenario
  chooses monthly payment option (Option #2), the            in which the borrower elects to take the up-front
  mortgage will be paid off, and the borrower will           payment, and dies at age 90, exactly 15 years (180
  receive a monthly payment of $668. [NOTE: If               months) after taking out the reverse mortgage. We
  there was no first lien, the borrower would have           assume the value of the house is $519,732, (reflect-
  received $1021 per month.]                                 ing 15 years of 5% home price appreciation) and

June 6, 2006                                                                                                         10
  ab Mortgage Strategist

  the accreted value of the loan is $398.917. Thus, $120,815 reverts to the estate.
  Now let us consider the case in which the borrower elects the monthly payment option (Option #2). The
  borrower must take $50,000 up-front in order to pay off the first lien. Given the borrower’s age, ap-
  praised home value, interest rate, etc., our borrower can receive a payment of $668 per month. Thus,
  when the borrower dies, both the accreted value of the loans plus the future value of the monthly pay-
  ments must be subtracted from the terminal value of the property. If the borrower dies at 80, exactly 60
  months after the mortgage was taken out, he would owe $47,828, the future value of 5 years (60 months)
  of monthly payments, plus an accreted loan amount of $70,126 (on the original $50,000 loan). Thus,
  $201,116 reverts back to the estate ($319,070 from the sale of the house - $70,126 to pay back the cash
  lien - $47,828, the future value of the monthly payment stream). If the borrower dies at 90, the value of
  the property would be higher, but the future value of the original $50,000 loan would be higher, and a
  lot more monthly payments have been made to the borrower. Under these circumstances, Table 1 shows
  the estate is then left with $172,795.

  There are 3 basic types of reverse mortgage programs:

      1. Home Equity Conversion (or HECM) Mortgages
      2. Fannie Mae Home Keeper (FMHK) Mortgages
      3. proprietary reverse mortgage products
                                                                                       Table 2. HECM Loans
  The HECM Program                                                                           Endorsed
  The HECM program is offered by the Federal Housing Administration (FHA)
                                                                                       Fiscal        # of Loans
  a division of the Department of Housing and Urban Development, and all                Year         Endorsed
  HECM mortgages are FHA-insured. This is the by far the largest of the re-             2001                7,781
  verse mortgage programs, and has experienced very robust growth, as can be            2002               13,049
  seen in Table 2 (at right). In fiscal year 2003, there were only 18,097 reverse       2003               18,097
                                                                                        2004               37,829
  mortgage loans endorsed. This number doubled to 37,829 loans in fiscal year           2005               43,131
  2004, and 43,131 in fiscal year 2005. For the first half of fiscal year 2006 (Oc-    2006*               33,191
                                                                                      *1st half through March.
  tober 2005-March 2006), loan endorsements are 33,191, suggesting volume of
  66,000 for the full year.
                                                                                 Table 3. HECM Borrower Age
  To be eligible for a HECM loan, a borrower must be aged 62 or over and
  live in the home as a principal residence. Empirically, we find that most of    Borrower Age              %
  the borrowers that take out HECM loans are considerably older than the             61 - 65                3
  minimum age. Table 3 (at right) shows that the largest single borrower             66 - 70               14
                                                                                     71 - 75               22
  concentration of age at origination is in the 76-80 year old group. In fact,
                                                                                     76 - 80               25
  borrowers aged 71-85 comprise 68% of the HECM loan recipients. This                81 - 85               21
  data should be viewed as indicative, not comprehensive. It was provided            86 - 90               10
  to UBS by a major originator of HECM products, and captures a sample               91 - 95                3
  of the loans made by this originator.                                                >96                  1
                                                                                           Total           100

June 6, 2006                                                                                                        11
  ab Mortgage Strategist

  The home must be a single-family residence in a 1- to 4-unit       Table 4. HECM Property Type Breakdown
  dwelling, a condominium, or part of a planned unit develop-
  ment (PUD). Some manufactured housing is eligible. Table                  Property Type              %
                                                                     Single Family                    84
  4 (at right) shows the property type breakdown of HECM             Condomimium                       9
  loans (data again provided by one major originator). Note          Pud Detached                      3
  that 84% are single family properties, while another 9%            Two Family                        2
                                                                     Manufactured Housing             <1
  are condominiums.                                                  Townhouse                        <1
                                                                     Three Family                     <1
  Payment Options                                                    Four Family                      <1
                                                                                          Total       100
  A HECM mortgage can be taken out in any of the following

     •   Tenure - Equal monthly payments as long as at least 1 borrower lives and continues to
         occupy the property as a principal residence
     •   Term - Equal monthly payments for a fixed number of months selected.
     •   Line of Credit - Unscheduled payments or installments, drawn down at times and
         in amounts of the borrower’s choosing until the line is exhausted. This line will grow
         over time.
     •   Modified Tenure - Combination of line of credit and monthly payments for as long as
         the borrower remains in the home
     •   Modified Term - Combination of a line of credit and monthly payments for a fixed
  The up-front payment, regardless of purpose (to pay off a first
  lien, or take a vacation) is considered to be a part of the line of  Table 5. HECM Product Breakdown
  credit. Table 5 (at right) shows the product breakdown for a ma-
  jor originator of HECMs; over 80% of HECM borrowers selected Line Product of credit
  a line of credit, while 13% selected either tenure or modified ten- Tenure                 8        5.77
  ure. In our simplified example in Table 1, we wanted to show de- Modified Tenure           5        5.72
                                                                      Modified Term          5        5.66
  terministically how the reverse mortgage would impact the estate. Term                     2        5.76
  Thus, we included only 2 options: a line of credit in which the                  Total    100       5.69
  amount was drawn down immediately, and a modified tenure, in
  which the up-front payment was used to pay off the first lien. In reality, borrowers have far more flexibil-
  ity than we indicated in our example.
  Under the conditions of a reverse mortgage, when the house is sold, or no longer used a primary resi-
  dence, the borrower or their heirs will repay the drawn portion of the credit line (or monthly payments)
  plus interest to the lender. The remaining value of the house belongs to the estate. It is possible that home
  price appreciation might be low enough, and the borrower might live long enough, that the price of the
  house is less than the accreted value of the outstanding loans. For example, assume in Table 1 that our 75
  year-old borrower selected Option 2, receiving a $50,000 up-front payment to cover the first lien, and
  additional payments of $668 per month. If that borrower died at 90, he would owe $346,937 ($137,947
  from the up-front loan and $208,990 from the monthly payments). If the house value had appreciated
  2% per annum (rather than the 5% we assumed in Table 1), the appreciated house value would be
  $336,467, or approximately $10,500 less than the amount due on the reverse mortgage. From on investor’s
  point of view, this is not an issue: Government insurance would cover this, as the loans are FHA insured.
  From a borrower’s point of view, it is also not a concern, as the loans are non-recourse.

June 6, 2006                                                                                                      12
  ab Mortgage Strategist

  The interest rate on the HECM loan is generally reset either monthly      Table 6. HECM Margin Distribution
  or annually, based on [1-year CMT + a margin]. Table 6 (at right)
  shows the distribution of these margins for a major originator of             Margin(%)            %   WAC
                                                                            1.001 - 1.500            96  5.68
  HECMs. The weighted average margin is 1.51% over the index.
                                                                            1.501 - 2.000             0  5.55
  For 96% of the loans, the margin is in the range of 1.00-1.50%.           2.001 - 2.500             4  5.74
  In addition to the interest expense, the borrower must pay a Mort-        3.001 - 3.500             0  7.09
                                                                                           Total    100  5.69
  gage Insurance Premium (MIP) for the FHA insurance. This pre-
                                                                                       Minimum     1.05%
  mium is equal to [2% of the up-front amount + an annual premium                     Maximum      3.10%
  equal to 0.5% of the loan amount]. The mortgage insurance pre-             Weighted Average      1.51%
  mium is meant to guarantee that if the loan servicer goes bank-
  rupt, the government will step in and make future payments. The MIP also guarantees that if there is
  any shortfall between sales price and repayment amount, the government will make up the difference.
  In addition to the MIP, reverse mortgages also carry application fees, origination fees, and often a monthly
  servicing fee. These charges are generally paid by the reverse mortgage, and the costs are added to the
  principal and paid at the end, when the loan is due.

  How Much Can Be Borrowed?
  The amount that can be borrowed depends on a borrower’s age, the current interest rate, and the ap-
  praised value of the home. Moreover, the maximum size of a HECM mortgage will depend on the
  maximum HUD loan limit. This varies by county, and is adjusted annually. Currently, the maximum is
  $362,790 for single family homes in high cost areas and $200,160 for rural areas. That is, the limit in high
  cost areas is 87% of the conventional limit of $417,000. It is 48% of the conventional limit in low cost
  areas. The implications of these limits are clear—if two borrowers of the same age applied for a loan at
  the same time, one with a home value of $362,790 and another with a home value of $1,000,000, they
  would both receive exactly the same HECM loan. When there is more than one borrower, the loan
  amount in a HECM mortgage is determined solely by the age of the younger borrower.
  Table 7 (top, next page) illustrates the amount that can be drawn out under the HECM program. These
  calculations assume the home is located in a high cost area, and were computed using the calculator that
  can be found on the Wells Fargo website (Wells Fargo is a major originator of reverse
  mortgages). Thus, if a home was appraised for $250,000, a 65 year-old borrower would have a credit line
  available for $116,568; the credit line would be $144,590 if the borrower were 75, and $174,894 if the
  borrower were 85. Similarly, if the tenure option was selected, a 65 year-old borrower would receive
  $744/month, a 75 year-old borrower would receive $1021/month, and an 85 year-old borrower would
  receive $1568/month. If the home appraised for $1,000,000, the FHA loan limits would be binding,
  limiting the amount the borrower could receive. Thus, a 65 year-old borrower would have a credit line of
  $172,286, which is only 46% higher than that available on a $250,000 home.

  Fannie Mae Home Keeper
  The Fannie Mae Home Keeper Mortgage Program is Fannie Mae’s conventional market alternative to
  the HECM product. It works much like a HECM; the borrower can receive fixed monthly payment for
  life (i.e., for as long as the borrower occupies the home as his/her principal residence), a line of credit, or
  any combination of monthly payments or a line of credit. However, the Fannie Mae Home Keeper can
  be used for a broader array of alternatives, including condominiums that are not FHA-approved and
  new home purchases. The latter is particularly important, as HECM Mortgages require that borrowers
  have been in their home for at least a year. Let us assume a 75 year-old man wants to sell his home in
  Philadelphia, with a value of $150,000, and buy a $200,000 home in Florida. To avoid a mortgage
June 6, 2006                                                                                                      13
  ab Mortgage Strategist

                                               Table 7. HECM Reverse Mortgage Options

               City/State:                   Montclair, NJ
               County:                             Essex
               Home Value:                   $   250,000
               Liens:                                    0

              Birth Year                         1944         1941      1936     1931       1926      1921      1916
              Age                                 62           65        70       75         80        85        90
            1 Cash Available                      108,971    116,568   130,034   144,590   159,775   174,894   189,273
              Loan-to-Value                         43.6%      46.6%     52.0%     57.8%     63.9%     70.0%     75.7%
            2 Monthly Income Available                684        744       864     1,021     1,236     1,568     2,190
            3 Line of Credit:
              Creditline Available               108,971     116,568   130,034   144,590   159,775   174,894   189,273
              Annualized Growth Rate               7.22%       7.22%     7.22%     7.22%     7.22%     7.22%     7.22%
              Creditline Value In 5 Years        154,403     165,168   184,247   204,873   226,389   247,811   268,185
              Creditline Value In 10 Years       218,777     234,030   261,064   290,288   320,775   351,129   379,997

               City/State:                   Montclair, NJ
               County:                             Essex
               Home Value:                   $ 1,000,000
               Liens:                                    0

              Birth Year                         1944         1941      1936     1931       1926      1921      1916
              Age                                 62           65        70       75         80        85        90
            1 Cash Available                      161,305    172,286   191,730   212,715   234,555   256,216   276,686
              Loan-to-Value                         16.1%      17.2%     19.2%     21.3%     23.5%     25.6%     27.7%
            2 Monthly Income Available              1,012      1,100     1,275     1,501     1,815     2,297     3,201
            3 Line of Credit:
              Creditline Available               161,305     172,286   191,730   212,715   234,555   256,216   276,686
              Annualized Growth Rate               7.22%       7.22%     7.22%     7.22%     7.22%     7.22%     7.22%
              Creditline Value In 5 Years        228,557     244,116   271,666   301,401   332,346   363,037   392,042
              Creditline Value In 10 Years       323,847     345,893   384,929   427,061   470,908   514,395   555,492

  payment on the new home (as the borrower’s in-                       HomeKeeper would only allow $42,817. These
  come is very limited), the borrower would have to                    numbers were again obtained using the financial
  use the entire $150,000 proceeds from the sale of                    calculator on
  the Philadelphia home, plus another $50,000 in                       The interest rate on the Home Keeper mortgage is
  savings. If the borrower does not have the $50,000,                  determined as a spread above an index rate—the
  he could not buy the new home (unless he quali-                      current weekly average of the 1-month secondary
  fies for and is able to obtain a regular mortgage).                  market CD rate, which is published by the Fed-
  But the borrower could seek an FMHK reverse                          eral Reserve. The rate on the Fannie Mae Home
  mortgage, which can be used to bridge the $50,000                    Keeper mortgages adjusts monthly.
  Note that even though the loan limits are higher                     Proprietary Products
  for Fannie Mae programs than the FHA programs,                       There are a number of lenders that offer propri-
  the amount that can be drawn out under the                           etary mortgage products. As on the HECM and
  Fannie Mae Home Keeper Program is usually less                       FMHK products, the interest rates are variable.
  than what can be drawn out under the HECM pro-                       These proprietary products generally build in ad-
  gram. This is illustrated in Table 8 (top, next page).               ditional protections to make sure the accreted value
  A 65 year-old borrower with a home worth                             of the loans will not be higher than the home value.
  $250,000 could draw out $116,568 under the                           First, these proprietary products do not have a ten-
  HECM program, while the Fannie Mae                                   ure option, as the lenders are unwilling to absorb
June 6, 2006                                                                                                                  14
  ab Mortgage Strategist

                                                   Table 8. Program Comparison

      Home Value:                    $ 250,000                                    $ 250,000
      Birth Year                           1941                                        1921
      Age                                     65                                          85
                                      FHA/HUD    Fannie Mae Proprietary Reverse   FHA/HUD Fannie Mae Proprietary Reverse
                                      Monthly    HomeKeeper Mortgage Program      Monthly HomeKeeper Mortgage Program
    1 Cash Available                    116,568       42,817             42,709     174,894  136,990             115,734
      Loan-to-Value                       46.6%        17.1%              17.1%       70.0%    54.8%               46.3%
    2 Monthly Income Available              744          336                N/A       1,568    1,334                 N/A
    3 Line of Credit:
      Creditline Available             116,568        42,817            42,709        174,894   136,990           115,734
      Annualized Growth Rate             7.22%            N/A            5.00%          7.22%        N/A            5.00%
      Creditline Value In 5 Years      165,168        42,817            54,508        247,811   136,990           147,709
      Creditline Value In 10 Years     234,030        42,817            69,568        351,129   136,990           188,518

      Home Value:                    $1,000,000                                   $ 1,000,000
      Birth Year                           1941                                          1921
      Age                                     65                                            85
                                      FHA/HUD    Fannie Mae Proprietary Reverse    FHA/HUD Fannie Mae Proprietary Reverse
                                      Monthly    HomeKeeper Mortgage Program        Monthly HomeKeeper Mortgage Program
    1 Cash Available                    172,286       74,901            178,134       256,216  231,524            470,234
      Loan-to-Value                       17.2%         7.5%              17.8%         25.6%    23.2%              47.0%
    2 Monthly Income Available            1,100          587                N/A         2,297    2,255                N/A
    3 Line of Credit:
      Creditline Available             172,286        74,901           178,134        256,216   231,524           470,234
      Annualized Growth Rate             7.22%            N/A            5.00%          7.22%        N/A            5.00%
      Creditline Value In 5 Years      244,116        74,901           227,349        363,037   231,524           600,151
      Creditline Value In 10 Years     345,893        74,901           290,161        514,395   231,524           765,961

  the risk that the borrower will live long enough                home valued at $1,000,000, a 65 year old borrower
  that total payments may be higher than the value                can have a marginally larger line of credit using
  of the house. Second, the growth rate on the line of            the proprietary product ($178,134 versus $172,286).
  credit may be freely altered by the lender. These               An 85 year old borrower would have a huge ad-
  protections are important to the investor, as there             vantage using a proprietary product versus a
  is no government guarantee on these loans.                      HECM ($470,234 versus $256,216).
  From the borrower’s perspective, the big advan-
  tage of the proprietary products is they do not have            Conclusion
  a loan limit. Thus, for a home with a high appraised            This article provides a brief introduction to the re-
  value, the borrower is often better off with a propri-          verse mortgage market. We believe that traditional
  etary product. This can be seen in Table 8, which               MBS investors will be well rewarded for taking the
  compares the HECM product (found on                             time to understand this new sector. Reverse mort- with a proprietary reverse mort-               gage products have become much more popular
  gage offering from Financial Freedom (created                   over the past few years, and will continue to grow
  using the reverse mortgage calculator on                        in importance. This growth will be further aided Financial Freedom is                 by changing demographics. Moreover, over the
  another major originator of reverse mortgages.                  past year, there have been several securitizations
  Note that for a home valued at $250,000, the                    of reverse mortgages. As reverse mortgage prod-
  HECM product gives the borrower (regardless of                  ucts grow in popularity, we expect the number of
  age) a much larger line of credit than the propri-              originators offering them, as well as their
  etary product offered by Financial Freedom. For a               securitization volumes, to increase.♦

June 6, 2006                                                                                                                15